Why open markets matter

Why open markets matter

People trade and governments open markets because it is in their interest to do so. Trade and market openness has historically gone hand-in-hand with better economic performance in countries at all levels of development, creating new opportunities for workers, consumers and firms around the globe and helping to lift millions out of poverty. Relatively open economies grow faster than relatively closed ones, and salaries and working conditions are generally better in companies that trade than in those that do not. More prosperity and opportunity around the world also helps promote greater stability and security for everyone.

So does trade really benefit ordinary people?

Trade has contributed to lifting hundreds of millions of people out of poverty: the share of the world's population living on less than PPP USD 1.90 per day fell from around 35% in 1990 to less than 10% in 2015. Evidence on the impact of trade on poverty in developing countries over 1993-2008 shows that the change in the real income of the bottom 20% of the population is strongly correlated with the change in trade openness over the same period. Developing and emerging economies are playing a more important role today in trade than ever before, contributing to declining inequality among countries (though not always within countries).

Trade has delivered unprecedented access to goods and services, with a revolution in the availability of goods for low income households. Take the cost of purchasing a television set, for example: between 1980 and 2014, the price of a roughly comparable TV set fell by 73%, in part as the result of ambitious trade liberalisation efforts – and the smart television sets we buy today are vastly better than those available in the 1980s. Lower prices are particularly beneficial for poor households, which spend relatively more on heavily-traded products (for example, staples such as food and garments).

Not only does trade lower prices, it also provides jobs for millions of people around the world. In a large country like the United States, around 10% of the workforce is involved in producing goods and services that are exported and consumed abroad, which amounts to around 14 million American jobs. The share goes up to 20% for France, almost 30% for Germany, and 47% for a small open economy like Ireland.

Across all countries, the share of jobs that rely on trade is significantly higher when taking into account “indirect” exports (when a person or company sells a good or service to another actor in the domestic market that uses it as an input in its exports). In some countries like China these can out-number jobs in the exporting industries themselves. These indirect export channels are especially important for smaller firms.

Trade also plays a role in raising incomes and improving overall working conditions. Exporters in the United States, for example, on average pay wages that are 6% higher than non-exporters. And whether the measure is injuries on the job, child labour, informality, or effects on female labour, open economies significantly out-perform closed ones, and labour rights are generally better respected.

Trade also helps businesses become more productive and innovative

Trade openness also benefits firms, by giving producers access to bigger markets, allowing them to increase the scale of their production, and encouraging market competition and innovation. Firms that export tend to be more productive than those that do not.

Trade also allows new technologies to move more freely around the world, benefitting more companies and more people. Smaller businesses in particular stand to gain from spill-overs of technology and managerial know-how, as well as opportunities to scale up and enhance productivity. The more a country trades, the more technology and ideas spread; workers get more done, and higher productivity can lead to better wages.

Trade can lead to structural changes, which requires adjustment assistance

A powerful driver of structural change, trade helps to reallocate resources to the sectors and areas where they can be most efficient. This is one of the key gains from trade, but also one of its costs. Not all of the gains from trade are immediate, and not every worker benefits. Losses can be sharp and concentrated on individuals, often those with the least capacity to adjust on their own. So as well as ensuring people are able to take advantage of opportunities from trade and technology, governments must also find ways to help those facing hard adjustment.

In the face of these concerns, governments can feel pressure to implement protectionist policies and measures – including tariffs, quotas and various forms of subsidies – as a way of 'saving' domestic jobs and enterprises. However, protection penalises those it aims to protect: jobs retained solely by protection are unlikely to be sustainable, nor to generate other jobs; protecting specific jobs or firms is a costly way of helping relatively few people, with costs (increasing over time) for jobs in other sectors, and for low income households facing higher prices. A better approach is a combination of domestic and international policies to foster inclusive growth and share the gains from trade.